Crowdfunding, as the name suggests, is a method of raising funds from a large group of people, rather than from an individual investor or lender. Crowdfunding can be an important source of finance for both start-ups or growing businesses and it has a number of important benefits over other funding methods.
In this guide, we’ll explain how crowdfunding works, its benefits compared to other methods of financing and the factors that determine a successful crowdfunding program. We’ll also outline the services available from the best crowdfunding sites in the UK.
Crowdfunding is a relatively new entrant to the business financing landscape and it draws on the power of the Internet, allowing you to pitch your investment opportunity to a very large audience, anywhere in the world.
That audience is likely to include many individuals who would not be considered ‘investors’ in the traditional sense of the word.
The pitch might also reach professional investors looking for a good, small low-risk opportunity, but the largest proportion of your audience will probably be non-specialists. That can be an advantage because you will not have to go through the ‘forensic examination’ you might face with a professional investor.
That’s not to say you don’t need a very strong business and financial case for your pitch, but you won’t be facing searching questions from a ‘Dragon’s Den’ panel of thousands of potential investors.
In a crowdfunding programme, a large group of investors each contribute a small amount of money to fund a specific business or project. Typically, this would be funding to start a new business or finance to undertake a project that will drive business growth. In return for their contribution, the investors might expect a reward of some type.
If your pitch is successful, donors provide funds online through your chosen crowdfunding website. At the end of your campaign, you can withdraw the funds minus any fees payable to the website.
If you do not reach your target, some websites return funds to donors; others may allow you to keep the actual amount raised, but charge a fee for releasing the money.
Different crowdfunding sites have specific rules on timing, prohibited products or services, length of campaign and financial limits. We’ll highlight those in the review of crowdfunding sites later.
In theory, crowdfunding looks like an easy option for raising finance. However, it takes time and effort to run a successful campaign. But, if you approach crowdfunding in the right way it can offer important benefits.
Crowdfunding represents a low-risk investment for you and your potential donors. They do not have to risk large amounts of money with no guarantee of a return and you will not be dependent on the requirements of a single investor.
The response of your audience can help you gauge the likely success of your product or venture. If there is a very poor response to your proposed new product or business, for example, that can help you decide if the idea is viable. In that sense, it is a useful form of test marketing.
An enthusiastic response, on the other hand, can give momentum to your campaign and indicate that your offer is strong and your communications are effective.
Crowdfunding gives you the opportunity to bypass traditional funding sources that may not be available to you because of the size of your business or the nature of your offer. If you choose one of the crowdfunding options that do not involve equity, you will retain control of your business.
You should be aware that crowdfunding does not offer an automatic guarantee of success. With many businesses trying to attract attention to their offer, you could put a great deal of effort into the campaign and fail to reach your target. You should also be aware of the risk of exposure to scammers.
Like any funding campaign, crowdfunding requires careful preparation to ensure success. Your aim is to attract, engage and retain the attention – and money – of a large community of enthusiastic followers.
They might be customers, suppliers or individuals with an interest in your company of products. With the right offer and the right incentive, they can become your investors. These are the four key stages of the planning process:
Create an attractive offer and reward programme.
Select a crowdfunding website
Run a marketing and communication programme
The first step is to create a clear, attractive offer. Maybe you want to start a new venture. Your backers will want to know what type of company you plan to set up, why it is important and why you think it will succeed.
If you run an existing business, you may want to extend your product range, install new equipment or start another project that will help improve efficiency. Your backers will want to know why the project is important to your business and how it will make a difference.
Clear messages are particularly important if you are trying to attract equity or debt crowdfunding. Investors want a clear indication that their investment will provide a good return with minimal risk.
If you are offering rewards to donors, your reward should be attractive and relevant to your offer. It should also be flexible, so that larger donors receive greater rewards.
Product-based rewards might include free samples or discounts on future purchases. General-purpose rewards, such as tokens, vouchers or tickets to entertainment venues might attract a wider audience. Equity campaigns require you to offer shares in your business.
There are four main types of crowdfunding sites:
Investors provide funds but they do not expect or receive anything in return. This platform is widely used by charities, but may also be suitable for ethical businesses.
Crowdfunder – This site provides funding for ethical businesses and offers a bonus of additional funds on top of the amount your campaign raises.
JustGiving – JustGiving is a general-purpose donation site, primarily used for consumer and charity causes, though it may be suitable for small business projects with lower funding requirements.
Investors provide finance and receive rewards in the form of relevant products, tokens or services. Generally, the bigger the investment, the more valuable the reward.
Kickstarter – This site is very easy to use; just set your target and the timeframe for your campaign. Check that your products or services don’t fall within the site’s prohibited list.
Indiegogo – Indiegogo offers two options. Fixed funding requires you to set a target; if you don’t hit the target, money is returned to donors. Flexible funding allows you to keep any money you raise, regardless of your target.
Investors provide funds and receive shares in the company as a reward. Investors may find their shares increase in value, but there is also a risk that they could lose money if the venture fails.
Seedrs – As the name suggests, this is a site focused on finance for start-ups. In addition to its role as a fundraising platform, Seedrs offers support and advice on running successful campaigns.
Crowdcube – Using Crowdcube, you offer investors a stake in your business, with the percentage based on the size of investment. However, if your campaign fails to reach its target, all the money is returned to donors.
Investors provide funds and receive back their contribution plus interest after an agreed period of time. This is a form of business loan and is also known as Peer-to-Peer (P2P) funding.
Funding Circle – This site brings lenders and businesses together and offers both secured and unsecured loans.
Zopla – This site is easy to use and offers low interest rate loans to borrowers with good returns for lenders.
As crowdfunding has become mainstream, it can be difficult to stand out from the crowd and attract the attention of investors. That makes marketing and communication an essential element of your campaign.
Presenting your pitch on YouTube, posting announcements and updates on Facebook, Instagram and other social media platforms can spread the word about your offer at relatively low cost. It's also important to make contact with business publications relevant to your industry by issuing press releases and briefing journalists.
If you can capture contact details of donors, maintain communication with them via email or text messages to keep them up to date with progress on your project and your campaign. Retaining supporters is as important as attracting them.
Crowdfunding offers an important source of funding for your start-up or growing business. However, it takes a great deal of time and effort to succeed and your campaign must be based on sound business and financial principles.
If you would like advice on the most suitable crowdfunding approach for your project and support in preparing your business and financial case, our team of experienced small business advisers and accountants will be glad to help. We offer business valuations, can help create excellent business plans and can also help with cashflow and sales forecasts.
To find out more, please contact us on 0207 043 4000 or email@example.com.